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Thursday, Mar 28, 2024

Real Estate: Developers say health care projects are stable investments in today’s market.

Area real estate experts say medical office building developments and hospital expansion projects are good property investments. As area health care providers address the increasing public demand for medical services by growing their facilities, those in the real estate industry tout the benefits of health-related projects, including a higher occupancy rate and more stable tenants. In the San Fernando Valley region, Facey Medical Group is building a 124,000-square-foot outpatient center in Mission Hills. Valley Presbyterian Hospital is planning to add a 75,000-square-foot medical office building to its Van Nuys campus. These projects represent multi-million dollar investment opportunities for San Diego-based Pacific Medical Buildings and Johnston Group of Agoura Hills, respectively. Plans for new medical developments won’t much improve the ailing real estate market, but larger companies see diversifying their portfolios with investments in medical spaces as a wise move, said Michael Dettling, director of health care real estate for Ramsey Shilling Commercial Real Estate Services in Los Angeles. “The medical area happens to be low risk, high return,” Dettling said. The medical asset class has gained a lot of popularity, he said, adding the occupancy rate is high. Medical office buildings historically have performed well as investments, said Barry Weinbaum, vice president of business development of Pacific Medical Buildings. “That is one of the reasons that these REITs (real estate investment trusts) have been very actively trying to acquire medical office buildings because of their stability,” Weinbaum said. Doctors also are more reliable tenants than most because they tend to stay longer, said Phyllis Palin, vice president of Colliers International. Palin specializes in medical office leasing in greater Los Angeles, and is a member of the Colliers Health Care Services Group, which focuses on healthcare real estate-related needs. Unemployment is high and medical providers are the ones who haven’t been as affected, she said. “A lot of others (offices) have closed their doors because they can’t survive,” she said. To be sure, medical office and hospital projects are challenging. Developers say they have to contend with building and fire codes, which can delay or scale back medical office and hospital projects. Construction of the Palmdale Regional Medical Center last year was delayed for nearly a year when the Office of Statewide Health Planning and Development required the addition of fire dampeners and the installation of 450 more smoke detectors in the 129-bed facility and 35-bed emergency room. Unanticipated delays can arise with construction projects, but the center worked with the agency to fulfill those obligations, said Karen Faulis, the hospital’s chief operating officer. Project Financing In order to keep new expansion projects in the pipeline, many health care facilities are searching for ways to save money, said Jason Clark, managing director of healthcare solutions at Jones Lang LaSalle in Los Angeles. “Many times, outside developers are leasing back (facilities) to the hospital” to help cover the project costs, Clark said. The Facey Medical Group will be leasing its new outpatient center building from developer Pacific Medical Buildings, said Prub “P.K.” Khurana, administrative director of strategy and planning for Facey Medical Foundation. The total cost of the project is about $50 million, Khurana said. Facey will provide about $15 million to $20 million for the construction of the three-story medical office building, and the developer will cover the rest of the bill, he said. With a multi-million dollar project, it helps to have capital partners so cash can be reserved for patient care, Khurana said. “We are in patient care, and we don’t want to be bothered by managing a real estate portfolio,” he said. Although the project is still on track to be completed next fall, it has faced some challenges, Khurana said. Those include complying with certain health care guidelines and dealing with increasing equipment and construction costs. “In addition to that, once it’s ready for use, we have to find doctors, and there is a provider shortage in our market,” Khurana said. The expansion will provide more space for an additional 17 to 20 primary care providers and specialists and more parking. The patient experience will be improved with the addition a central check-in station and a greater to assist visitors, Khurana said. “We weren’t interested in disrupting patients by doing redevelopment (at the existing Mission Hills location), so the millions spent was worth it,” Khurana said. Johnston Group in Agoura Hills is the developer for the estimated $28 million Valley Presbyterian Hospital project. Company President Jeff Johnston said the hospital will lease the land for the project from his firm. The project was a good investment because the medical field will continue to be a good market, Johnston said. “They are investing in their facility and improving, so in the long run, it’s a good bet,” Johnston said. “Right now, we are having challenges with DWP (Department of Water and Power), and they want to relocate a transformer in that area,” he added, noting that the company is working with the agency to accomplish that objective. Construction on the project is expected to begin by the end of the year on the facility, which will create about 24 physician offices, said Julie Reback, Valley Presbyterian’s vice president of business development. The hospital is still in discussions with prospective tenants, she said. Some physicians have resisted committing to projects because there’s still a lot of uncertainty about what health care reform will bring, said Dettling of Ramsey Shilling. “It’s kept some on the sidelines,” he said. Ramsey Shilling is planning to develop two medical and dental-related facilities in Sylmar and Burbank, but so far no tenants have committed to occupy space at the project, Dettling said. In Sylmar, 12,000 square feet of a second-story property is expected to be reserved for medical and dental services, Dettling said. In Burbank, if all goes according to plan, a 10,000 square-foot location will be occupied with physicians, he said. Brokers As new medical office developments spring up, some developers and real estate brokers say they are partnering up to help make projects a success. Real estate services firm Jones Lang LaSalle in May teamed up with Pacific Medical Buildings to assist healthcare providers with development planning and financing solutions for real estate assets and construction projects, said Shawn Janus, managing director of healthcare for Chicago-based Jones Lang LaSalle. The slowdown in the commercial real estate market has prompted some brokers to develop expertise in the healthcare industry, said Mark Toothacre, Pacific’s president. “We will come in and be a capital source of development and deals will start to flow from that,” Toothacre said. Few real estate brokers are fully engaged in the medical field, but more are starting to become more involved, said Palin of Colliers. “Medical has a bit more security,” Palin said, noting property owners and real estate investors are drawn to the sector’s consistency and low vacancy rates. Going forward, health care projects will continue to be a strong niche in the region’s real estate market, Johnston said. “As the baby boomers age, I think that there will certainly be continuing opportunities in the medical field,” he said.

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